Franklin Resources Misses EPS Estimates Slightly Amid AUM Decline, But ETF Growth Shines

Franklin Resources (BEN) reported its Q2 2025 earnings with adjusted diluted EPS of $0.47, narrowly missing the IBES estimate of $0.473—a gap small enough to be statistically negligible but reflective of broader challenges in an industry grappling with market volatility and shifting client preferences. While the headline figure was in line with expectations, the details beneath the surface reveal both headwinds and opportunities for the asset manager.

AUM Declines, But Flows Highlight Strategic Shifts

Franklin Templeton’s total Assets Under Management (AUM) fell to $1.54 trillion as of March 31, 2025, a 2.2% quarterly drop driven by long-term net outflows at its Western Asset Management subsidiary and market-related headwinds. The $33.6 billion in outflows at Western—a fixed-income specialist—dragged down overall performance, though this was partially offset by strong inflows in strategic areas like alternatives and ETFs.

Key Flow Dynamics:
- Alternatives: Raised $6.8 billion, including $2.0 billion for the newly launched Franklin Lexington Private Markets Fund (FLEX). This segment now accounts for 16% of total AUM, a growing priority for the firm.
- ETFs: Achieved $4.1 billion in net flows, extending its 14-quarter streak of positive inflows. ETF AUM hit a record $37.0 billion, with 12 funds exceeding $1 billion in assets—a testament to the product’s popularity.
- Canvas®: The firm’s digital wealth platform set records with $1.2 billion in net flows, reflecting its push into retail and institutional hybrid solutions.

Financials Under Pressure, But Trends Are Mixed

The earnings report underscored the challenges of a low-growth, volatile market environment. Revenue dipped 4.3% quarterly to $1.61 billion, with operating income falling 8.6% to $377 million. Net income dropped 20.6% to $254 million, driven by $41 million in seed investment losses (a closed renewable energy fund) and foreign exchange headwinds.

Despite these declines, Franklin’s Adjusted Effective Fee Rate (EFR) rose to 38.3 basis points (bps) from 37.2 bps in Q1, aided by the outflows at lower-margin Western, which freed up space for higher-fee strategies like alternatives. Management emphasized that $200–250 million in annual cost savings by FY 2026—via operational efficiencies—could help offset margin pressures.

Performance and Geographic Trends

Franklin’s mutual funds and strategy composites showed uneven performance. While 58% of AUM outperformed peers over one year, 3-year results lagged due to categorization shifts in yield-focused fixed-income strategies. Meanwhile, non-U.S. AUM grew to $470 billion, with strong inflows in EMEA and the Americas. Putnam’s international launches and Franklin’s multi-asset strategies also provided bright spots.

Risks and the Path Forward

The elephant in the room remains Western Asset Management, whose outflows continue to weigh on the firm’s results. Management acknowledged the need to stabilize this division but faces a tough market for traditional fixed-income strategies.

Franklin’s strategy hinges on three pillars:
1. Alternatives and ETFs: These segments are growing rapidly, with alternatives now contributing $252 billion in AUM and ETFs hitting records.
2. Global diversification: Non-U.S. AUM accounts for 30% of the total, and institutional pipelines are expanding (e.g., the $20.4 billion unfunded mandate pipeline).
3. Cost discipline: The $200–250 million savings target could help offset margin pressures if realized.

Conclusion: A Mixed Bag, But Momentum in Key Areas

Franklin Resources’ Q2 results paint a picture of a firm navigating a challenging environment. While the AUM decline and net income drop are concerning, the resilience of its ETF and alternatives platforms—and the strategic shift toward fee-generating strategies—provides a foundation for optimism.

The firm’s cost-saving initiatives and geographic diversification are critical to offsetting Western’s struggles, but investors will need to see sustained inflows in growth areas to justify its valuation. With $37 billion in ETF AUM and alternatives driving $8.5 billion in fee-generating inflows, Franklin is positioning itself to capitalize on long-term trends. However, the path to recovery hinges on stabilizing Western and proving that its high-margin segments can offset broader market headwinds.

In the near term, Franklin’s stock—down 12% year-to-date—may remain volatile, but the structural shifts in its business suggest that the firm isn’t just surviving; it’s evolving. The question now is whether those changes can translate into consistent AUM growth and margin stability in the quarters ahead.